Big corporates over retail borrowers to benefit most from rate cuts

The move is also expected to revive credit growth as companies borrow to invest and thereby bolster growth in the wake of the November 8 demonetisation.Saloni Shukla | ET Bureau | January 05, 2017, 09:06 IST

MUMBAI: The sharpest rate cut by banks in more than seven years is likely to benefit big corporates more than retail borrowers. Companies can renegotiate contracts immediately, taking advantage of reductions of as much as 90 basis points, while more than 60% of retail borrowers are stuck in the earlier baserate regime where the drop has been a much narrower 5-10 basis points, experts said. Corporate loans are mostly pegged to the marginal cost of funds based lending rate (MCLR), which came into force in April 1 last year.

“Banks will pass on the rate benefits to large corporates as they have been able to raise money from money markets, so the bigger game lies in the industrial sector. We will have to see how this plays out,” said Siddharth Purohit, senior research analyst at Angel Broking. A basis point is one-hundredth of a percentage point.

Indian banks slashed interest rates over the weekend after Prime Minister Narendra Modi urged lenders to meet the funding needs of poorly served borrowers ranging from the poor to the middle class. The move is also expected to revive credit growth as companies borrow to invest and thereby bolster growth in the wake of the November 8 demonetisation.

“The better-rated corporates have an option of going to the wholesale markets because they can bargain for better rates from banks, so they will be better placed to enjoy benefits of lower rates as compared to poorly rated corporates,” said Ajay Bodke, CEO, Prabhudas Lilladher.

SWITCH TO MCLR

Starting April 1 last year, all loans have been pegged to MCLR. Companies with loans from before that date would have mostly shifted to the new system as these get renewed annually but home borrowers would have stayed put because of the switching fee involved.

“Most of the corporate loans get renewed in the last quarter because the audited balance sheet comes only after September, so the main shift has happened during the last quarter and the rest of the corporate book will shift by the end of this year,” said Arundhati Bhattacharya, chairman, State Bank of India. “There is no credit growth now but we believe these measures will pump up the credit growth.”

Only 30-40% of total floating rate loans are linked to MCLR while the rest are still linked to the base rate. State Bank of India, which charges a minimum Rs 10,000 to switch, cut its base rate by just 5 basis points recently to 9.25% against its one-year MCLR rate of 8%, which was slashed from 8.9% on Sunday.

About 15%, or Rs 13,000 crore, of SBI’s home loan book is linked to MCLR while 40% of its overall loan book is linked to the new system. SBI’s retail book size is Rs 3.4 lakh crore and total loans amount to Rs 14.8 lakh crore.

PROFIT EROSION

Banks with high exposure to big corporates like SBI and ICICI Bank are expected to suffer a steeper erosion in profitability than the rest. Credit Suisse estimated that the unexpectedly large rate cuts will reduce earnings by 4-18% and lead to margin compression by 10-15 basis points.

“We therefore estimate a 10-15 basis points NIM contraction (assuming MCLR does not go up with withdrawal of excess liquidity) on the back of these rate cuts,” Credit Suisse said. “We expect bank earnings to be weak in 3Q as loan growth has moderated to just 5% and banks have seen a drop in fees and higher operating expenses post demonetisation.” NIM is net interest margin—the difference between interest income and that which is paid out.

Analysts said larger private banks will see a sharper moderation in earnings than mid-sized ones. “Prima facie, the cut in lending rates appears to be quite steep and does raise concern if this is simply a reflection of the decline in recent cost of funds or the bank is looking to avenues to restart lending in the economy,” said MB Mahesh of Kotak Institutional Equities. “Also, we are not too sure if the cut merely represents a function of the tight MCLR regime which offers very limited flexibility or if this move represents an aggressive call from public banks to restart lending.” MCLR, a reform put in place by the Reserve Bank of India, allows for more dynamic rate transmission compared with the slower baserate mechanism.

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